The Reserve Bank of India (RBI) expects inflation to start easing from December, declining to seven per cent by March-end and moderating further in the first half of 2012-13, aided by the cumulative impact of monetary tightening and softening commodity prices.
While the banking regulator acknowledged the worsening risks to growth, hinting at a pause in rate rises, it maintained high inflation continued to remain a major macroeconomic concern.
“Changing the policy stance when inflation is still far above the tolerance level entails risks to the credibility of the central banks' commitment to low and stable inflation. However, growth risks are undoubtedly significant in the current scenario, and these need to be given due consideration,” the central bank said in a statement, while releasing its second quarter review of monetary policy for 2011-12.
India's headline inflation has remained stubbornly high, above nine per cent since December 2010. The benchmark wholesale price index-based inflation was 9.72 per cent, while consumer price index-based inflation was nine per cent in September. This was despite the central bank raising the policy rate by 350 basis points in 13 tranches since March 2010.
In comparison, headline consumer price inflation in September was 3.9 per cent in the US, 6.1 per cent in China and 7.3 per cent in Brazil.
RBI said the expansionary fiscal position has, so far, diluted the impact of monetary tightening.
Economists believe the slowdown in demand, improving supply and base effect would aid in reining inflation from December.
“Past policy actions are having their intended impact and clearly, the demand is slowing. The farm sector has done well, which would improve the supply. Plus, there is the base effect. All these put together would bring inflation down to seven per cent,” said Brinda Jagirdar, general manager and head of economic research at State Bank of India (SBI).
Goldman Sachs expects easing inflation may even prompt the central bank to cut rates starting from next financial year. “We continue to think with inflation and growth likely to surprise on the downside, RBI would likely cut interest rates in April 2012, and we have built in 100 basis points in rate cuts in 2012-13,” said Tushar Poddar, economist with Goldman Sachs.
However, any rise in global commodity prices, including crude oil and the depreciating rupee, pose a threat to RBI's inflation projections.
“The behavior of crude prices would be a crucial factor in shaping the outlook of domestic inflation in the near future...The benefit of decline in global crude prices in the recent period so far has been more than offset by the depreciation of the rupee in nominal terms. Thus, the exchange rate would also have some impact on the behaviour of domestic petroleum prices,” the central bank said.
The rupee had depreciated by more than 10 per cent in a period of six weeks. The domestic currency weakened 2.3 per cent against the greenback between end-September and October 21.
The increase in coal prices, which have an implication on electricity prices and administered petroleum prices in the domestic market, also have upside risks on inflation.
“While RBI has said the likelihood of rate action in December is relatively low, if the expected deceleration in inflation does not play out, risks on further monetary action, coupled with deteriorating global prospects and domestic policy issues, adds downside risks to our 2011-12 gross domestic product estimate of 7.6 per cent,” said Rohini Malkani, economist with Citigroup Global Markets.
